Incentivizing Production: What the OBBBA Means for Manufacturing

No sector is poised to feel a bigger impact from the One Big Beautiful Bill Act (OBBBA) than the manufacturing industry. Many of the most important provisions in the $4.5 trillion tax package were designed specifically to encourage domestic production. 

Although it remains unclear how the evolving tax and tariff landscape could shape long-term investment and supply-chain decisions, the OBBBA tax provisions have important implications for tax planning. 

Changes to the export deduction for foreign-derived intangible income (FDII) will make the deduction much more accessible for asset-heavy manufacturing. The overhaul of the tax on global intangible low-taxed income (GILTI) could create both challenges and opportunities for multinational manufacturers with global supply changes. Perhaps most importantly, the OBBBA restores domestic research expensing, 100% bonus depreciation, and a more favorable calculation of the limit on the interest deduction under Section 163(j). 

Many of the provisions offer different options for implementation. The effective dates are important, and there are time-sensitive planning considerations. Now that the legislation is final, manufacturers should assess its impact carefully and consider planning opportunities.

This Alert offers a more detailed discussion of the OBBBA provisions affecting the manufacturing industry. (For a broader look at the tax package, see our table comparing the tax provisions to current law. To hear a discussion of important questions raised by the act, watch a recording of our July 10 webcast. To read about the financial accounting implications, see our previous write-up.) 

Bonus Depreciation

The OBBBA permanently restores 100% bonus depreciation for property acquired and placed in service after January 19, 2025. It also creates a new elective 100% depreciation allowance under Section 168(n) specifically intended for manufacturing facilities. The deduction is available for nonresidential real property that is considered “qualified production property” if construction on the property begins after January 19, 2025, and before January 1, 2029, and the property is placed in service by the end of 2030.

A qualified production activity includes the manufacturing of tangible personal property, agricultural production, chemical production, or refining. Qualified production property does not include any portion of building property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or other functions unrelated to qualified production activities. 

There is an exception from the original use requirement if the acquired property was not used in a qualified production activity between January 1, 2021, and May 12, 2025. Special recapture rules apply if the property is disposed of within 10 years after being placed in service. 

The OBBBA also increases the Section 179 deduction to $2.5 million with a phaseout threshold of $4 million for property placed in service after 2024, with both thresholds indexed to inflation in future years.

Section 174 Research Expensing

The OBBBA permanently restores the expensing of domestic research costs for tax years beginning after December 31, 2024. Foreign research must still be amortized over 15 years. Taxpayers retain the option of electing to capitalize domestic research costs and amortize such amounts over either 10 years or the useful life of the research (with a 60-month minimum). 

The new treatment will generally be applied using an automatic accounting method change on a cut-off basis, with two alternative transition rules: Taxpayers can elect to claim any unamortized amounts incurred in calendar years 2022, 2023, and 2024 in either the first tax year beginning after 2024 or ratably over the first two tax years beginning after 2024. 

The legislation also amends Section 280C to again require taxpayers to reduce their deductions for research costs under Section 174A by the amount of any research credits (or reduce their credits by equivalent amounts), effective for tax years beginning after 2024. Under the Tax Cuts and Jobs Act (TCJA), taxpayers generally were required to reduce their Section 174 capital accounts only to the extent their research credits exceeded their current-year amortization deductions. For most manufacturers, that meant the amortization deductions and research credits were both allowed in full. 

Section 163(j) Interest Deduction Limit

The OBBBA permanently restores the exclusion of amortization, depreciation, and depletion from the calculation of ATI for purposes of Section 163(j), which generally limits interest deductions to 30% of ATI. The change is effective for tax years beginning after 2024.

This change could be enough for many capital-intensive manufacturers to escape the limit on their interest deductions altogether. Highly leveraged manufacturers, including those owned by private equity funds, may still need to plan around the limit. 

Unfortunately, the OBBBA shuts down interest capitalization planning for tax years beginning after 2025. Interest capitalized to other assets, other than interest capitalized to straddles under Section 263(g) or to specified production property under Section 263A(f), will remain part of the Section 163(j) calculation. Further, ATI will exclude income from Subpart F and GILTI inclusions and Section 78 gross-up for tax years beginning after 2025.

Foreign-Derived Intangible Income

The act significantly changes the FDII deduction, and many of the changes will make the deduction more accessible to manufacturers.

The effective rate on FDII, now named the foreign-derived deduction-eligible income (FDDEI), will increase from 13.1255% to 14% for tax years beginning after 2025. Although the new rate is slightly less preferential, other changes to the credit make it much more valuable. 

The OBBBA repeals the reduction to FDDEI for a deemed return on qualified business asset investment (QBAI) and provides that interest and research and experimental (R&E) costs are not allocated eligible income. The legislation also excludes income from transferring intangibles under Section 367(d)(4) or tangible property subject to depreciation, amortization, or depletion in the hands of the seller, effective for transactions occurring after June 16, 2025.

Global Intangible Low-Taxed Income

The act increases the GILTI effective rate while making both favorable and unfavorable changes to the underlying calculation, effective for tax years beginning after 2025.  

The effective rate for GILTI, now called “net CFC [controlled foreign corporation] tested income” (NCTI), will rise from 10.5% to 12.6% (without the effect of the foreign tax credit (FTC) haircut). The OBBBA reduces the FTC haircut under NCTI from 20% to 10%, resulting in an equivalent top effective rate of 14% (up from the current 13.125% rate). It also provides that 10% of taxes (compared to 20% absent legislation) previously associated with Section 951A taxed earnings and profits are not treated as deemed paid for Section 78 purposes.

The deemed return for QBAI is repealed, increasing the amount of income subject to the tax. The allocation of expenses to GILTI for FTC purposes is changed so that it includes only the Section 250 deduction, taxes, and deductions directly allocable to tested income. It also specifically excludes interest and R&E costs. 

Base Erosion and Anti-Abuse Tax

The OBBBA increases the base erosion and anti-abuse tax (BEAT) rate from 10% to 10.5% for tax years beginning after 2025. It also eliminates an unfavorable change to the BEAT scheduled to take effect in 2026 that would have effectively required taxpayers to increase their liabilities by the sum of all income tax credits. 

Other International Provisions

The act includes several other international provisions affecting manufacturers that will be effective for tax years beginning after December 31, 2025. For example:

• CFC look-through: The legislation makes permanent the CFC look-through under Section 954(c)(6), allowing manufacturers continued flexibility to perform transactions between CFCs.
• Downward attribution: The OBBBA restores the exception from downward attribution rules under Section 958(b)(4) that was repealed under the TCJA, replacing it with a narrower rule that will provide relief from reporting on some brother-sister CFC arrangements. 
• Inventory sourcing for FTCs: The legislation amends the FTC rules to treat inventory produced in the U.S. and sold through foreign branches as foreign-source income, capped at 50%.

Small and Private Manufacturers

The OBBBA makes several changes that could benefit private companies and smaller manufacturers:

• Qualified Small Business Stock: The act enhances the exclusion of gain for qualified small business stock under Section 1202 issued after the date of enactment, making the exclusion more accessible for new ventures. In addition to the existing 100% exclusion for qualified stock held for five years, taxpayers can qualify for a 50% exclusion after three years and a 75% exclusion after four years. The OBBBA increases the limit on the exclusion from $10 million to $15 million (or 10 times basis). It also increases the limit on gross assets at the time stock is issued from $50 million to $75 million.
• Pass-through deduction: Manufacturers organized as pass-throughs will benefit from the permanent extension of the Section 199A deduction. 
• Retroactive relief for research expensing: Manufacturers meeting the gross receipts test under Section 448 for the first tax year beginning after 2024 ($31 million in 2025) will be able to file amended returns to claim research expensing for tax years before 2025. This retroactivity is not available to small business taxpayers that are tax shelters, such as pass-throughs that allocate more than 35% of their losses to limited partners or limited entrepreneurs.

Compensation and Benefits Issues

The OBBBA makes several changes that will affect the tax treatment of employee compensation and benefits:

• Executive compensation: Public manufacturing companies will face new aggregation rules for applying the $1 million limit on deducting the compensation of covered employees under Section 162(m). The aggregation rules are based on a controlled group as defined under the qualified plan rules in Section 414 and will be used to determine both who is a covered employee and the amount of compensation subject to the limit.
• Overtime pay: Manufacturers will have to track and report information on overtime pay to employees and other workers under new provisions allowing individuals to deduct overtime pay. Taxpayers should not adjust employee withholding unless the IRS changes the withholding tables or the employee submits a new Form W-4. Manufacturers with large numbers of employees working overtime should consider communicating with employees about withholding issues.
• Meals deduction: The OBBBA creates an exception from the disallowance of the deduction for employee meals provided at the employer’s convenience that is scheduled to take effect in 2026. This exception will generally be available only if meals are sold in a bona fide transaction, so manufacturers should prepare to track a new category of disallowed deductions for meal expenses in 2026.
• Employee income exclusions: The legislation makes permanent the income exclusion for employer payments of student loans, as well as the repeal of the exclusions for bicycle commuting fringe benefits and for employer payments or reimbursements of moving expenses. Manufacturers must continue to include moving expense payments or reimbursement in employee income.
• Childcare credit: Manufacturers providing childcare benefits to employees may be eligible for an increased credit. The employer-provided childcare credit under Section 45F is increasing from 25% to 40%, and the cap on the credit is increasing from $150,000 to $500,000.
• Paid family and medical leave: Manufacturers claiming a credit under Section 45S for providing paid family and medical leave may be eligible for a larger credit. The OBBBA expands the credit to cover premiums for insurance policies that provide paid leave, creates a new aggregation rule, and allows the credit for providing leave for a broader range of employees.
• Form 1099 reporting: The thresholds for reporting payments to independent contractors on Form 1099-NEC and payments to other service providers on Form 1099-MISC will increase from $600 to $2,000 in 2026. Manufacturers will likely have fewer information reports in future years and should update reporting systems to reflect the new rules.

Credits and Incentives

The OBBBA repeals, phases out, and adds restrictions to most of the energy credits created and enhanced under the Inflation Reduction Act. 

Manufacturers in the energy supply chain will be hit the hardest. The advanced manufacturing credit under Section 45X will be repealed for wind energy components sold after 2027 but will otherwise be extended to allow for components sold a 75% credit in 2031, a 50% credit in 2032, and a 25% credit for 2033. The act fully repeals the credit beginning in 2034. New material assistance rules will affect the ability to source products from China.

Also, consumer and business credits for energy-efficient property, renewable generation equipment, electric vehicles, and electric vehicle charging stations  all expire over the next year. These credit phaseouts will significantly affect the demand for manufacturers in these production supply chains.

Manufacturers that are not in the energy industry but are pursuing projects to meet their own energy needs should assess the new phaseout rules and restrictions to determine whether their projects are still viable and their timelines are appropriate.

Next Steps

The OBBBA offers manufacturers important benefits designed to encourage the onshoring of domestic production activity. Many provisions will affect companies in very different ways. It will be critical to update tax planning strategies and model implementation options to fit company circumstances. 

Manufacturers also should consider the broader impact of the new tax and tariff landscape on long-term supply-chain planning and capital investment decisions.